A Field Guide to Economic Humans

Back in the late nineteenth century, the field of economics gave birth to the term Homo economicus (roughly, “economic human”). With all the new economic models and ideas that were being thrown around at the time, economists needed a stand-in for John and Jane Doe – some anonymous person who could serve as the rational, self-interested individual that their models required. This was Homo ecnomicus – a play of sorts on the Latin taxonomy used to classify all living organisms. The rest of us humans are just plain old Homo sapiens.

Over the last several months, a growing divergence between the economic outlooks of consumers and businesses in the United States has made it feel like Homo economicus was splitting into two different subspecies; one confident, and the other pessimistic. One of these subspecies, however, may be doomed to extinction.

Let’s classify the first as Homo economicus dubiī, or “the doubtful economic human.” Homo economicus dubiī, or H.e. dubiī, is perhaps the dominant subspecies. Evidence of H.e. dubiī can be found in the stagnant polls of business confidence. H.e. dubiī frets about the U.S. fiscal cliff, a showdown over the debt ceiling, and various other policy uncertainties. If he is a business person, he is unlikely to do any hiring or spend on capital expenditures until some amount of certainty can be had on these topics. H.e. dubiī looks at the fiscal cliff debate and his eye takes in the possible recession that could occur if all of the tax hikes and spending cuts were allowed to transpire…and he shudders. His favorite saying is “if you’re not worried, you’re not paying attention.”

The counterpart to H.e. dubiī is Homo economicus confidentis, or “the confident economic human.” Homo ecnomicus confidentis (or H.e. confidentis) is noted by her pronounced optimism.  H.e. confidentis sees house prices increasing and feels that her household wealth is returning. He looks at the unemployment rate ticking down, from seeing fewer friends and family being laid off, and feels that job markets are on the mend.  Evidence for resurgence of H.e. confidentis could be found in the recently strong consumer confidence numbers. Today, though, the ranks of H.e. confidentis have been quelled somewhat. The headline consumer confidence index from the Thomson Reuter/University of Michigan consumer sentiment survey showed a drop from 82.7 in November to 74.5. This is a sharp reversal in a recent upward trend we had seen since July. Consumer expectations, the forward-looking component of the survey fell to 64.6 from the final November reading of 77.6.

While H.e. confidentis had remained apparently blissfully unaware of the fiscal cliff and yet keenly aware of the strong underlying fundamentals in the U.S economy, he now seems to have awoken to the same reality that H.e. dubiī sees. Groups of H.e. confidentis most shocked into pessimism were those most likely to impacted by whatever cliff deal comes to pass.  Upper-income optimists had the biggest change in tone – confidence dropped 12 points for that group.  Lower-income confidence also fell – about 9 points.  The upper-income group is, of course worried, about higher tax rates.  Lower-income consumers are also rightfully worried, since they are likely to be the most affected by any increases in the payroll tax (a 2% increase your taxes paid matters a lot more when your base income is small).  Confidence for the middle-income H.e. confidentis, those perhaps least likely to be affected by changes in tax rates and spending policy, only fell 3.9 points.

This is a fragile ecosystem; overpopulation by H.e. confidentis can lead to overspending and overinvesting.  But too little confidence can also be damaging as well – a large population of H.e. dubiī can mean too little spending and over-saving.   This fall, populations of H.e. confidentis seemed to be stabilizing after being decimated as a result of the market volatility and debt ceiling debate in the summer of 2011. Now, however, he faces the threat of extinction.

Population declines are also a possibility for H.e. dubiī.  His downfall would come, or at least be hastened along, with a successful resolution to the fiscal cliff debate. With some uncertainty lifted, he would be moved to consider hiring and expanding output. A compromise on the fiscal cliff debate would starve him of some of his natural habitat and push his subspecies toward the door. However, since this outcome depends on rational, logical behavior from Homo polīticī (the political human), a species hampered by brinksmanship and political posturing. This outcome is, therefore, far from certain.

With any luck though, the fiscal cliff debate will be solved in a meaningful way either later this month or early next year. Unfortunately, as the issue is resolved in either a good or bad way, one of these subspecies of Homo economicus will likely see reduced numbers.  Let’s hope the neither subspecies goes extinct – the fragile ecosystem that is the U.S. economy needs its risk-averse H.e. dubiī and the ever-optimistic H.e. confidentis.